Iraq Turmoil Puts a Charge Into Oil Prices

By Brendan Conway

The price of oil is on the rise Thursday after an al Qaeda offshoot overran two cities in as many days in Iraq’s oil-rich north, threatening to create an extremist enclave in the country’s heart and calling into question the reliability of the country’s exports.

The Islamic State in Iraq and the Levant, or ISIS, this week seized Iraq’s second largest city of Mosul. Then it took Saddam Hussein’s hometown of Tikrit. The latest maneuver sees Kurdish forces taking up positions in Kirkuk after the Shiite-dominated government’s forces abandoned their posts there, reportAli A. Nabham and Tamer El-Ghobashy of the Wall Street Journal.

Now we’ve got reports that the leaders of the militant group, known as the Islamic State in Iraq and the Levant, or ISIS, are vowing to march on Baghdad. Amid this sign that the situation could widen into general sectarian conflict, investors’ reaction is to send crude-oil futures in New York higher by 1.5% to $105.99.

Commerzbank’s commodity strategists point out the militants also have control of the country’s biggest oil refinery in Baiji and Tikrit:

The central government in Baghdad increasingly appears to be losing control over wide areas of the country. Against this backdrop, the statement made by the Iraqi oil minister on the fringes of yesterday’s OPEC meeting – namely that no oil is currently being produced in the north of Iraq in any case and that oil production in the south of the country is “very, very safe” – appears almost farcical. So far, the oil market does not appear overly concerned, though this could change quickly if the rebels were to continue advancing and were also to threaten oil production in the south of the country, where more than twice as much oil is produced than under normal circumstances in Libya. It is virtually impossible to offset such huge supply outages. It will also be interesting to see how neighbouring countries – especially Iran and Turkey – react to the new situation in Iraq.

Nicholas Colas of ConvergEx Group suggests in a research note that was written before this morning’s price move that investors are behind the curve:

Iraq as a whole produces 3.6 million barrels of oil/day, so it is not as large a player as Saudi Arabia or Russia. But price happens at the margin, and the recent and largely unforeseen unrest in the country barely moved oil prices today. West Texas Intermediate is only $104.50 and Brent is just below $110. We don’t hear anyone really talking about oil prices yet, but that’s likely a blind spot caused by the “Same as it ever was” wiring of our predicting selves.

Ahead of Thursday’s open, the United States Oil Fund (USO) is rising by 1.4% while the United States Brent Oil Fund (BNO) is rising 2%. The leveraged ProShares Ultra DJ-UBS Crude Oil (UCO) is ahead by 3%. Energy Select Sector SPDR Fund (XLE), an ETF of energy stocks, is ahead by 0.4%.

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